India is poised to soon surpass China as the most influential country in a key emerging markets index, potentially attracting more foreign investment and boosting a stock market rally that Morgan Stanley says is “only past the halfway mark.”
India’s share in the MSCI Emerging Markets Index increased to 19.8% after an August reshuffle, nearing China’s 24.2%. India’s share has steadily risen from 9.2% in December 2020, while China’s has fallen from 39.1%.
“A higher weight essentially translates to more foreign investments,” noted analysts led by Ridham Desai in a Wednesday report. “Considering India is currently underrepresented in most emerging market portfolios, this bodes well for increased foreign inflows.”
Foreign portfolio investors (FPIs) have purchased shares worth 531.78 billion rupees ($6.33 billion) so far in 2024, maintaining their net buying position since June. This trend has been supported by policy stability post-elections and the anticipated start of global interest rate cuts.
Sustained investments from domestic institutions, mutual funds, and retail traders have driven the Nifty 50 index to record levels, with a 16% rise this year, outperforming most other markets, including China.
Desai predicts the rally will persist as fiscal consolidation paves the way for private borrowing and spending to drive the next phase of earnings growth. Increased foreign inflows are expected to maintain liquidity surpluses, strengthening the market.
“We believe we are only halfway through the current bull market. The peak for India’s bull market is likely still ahead, and its weight in the emerging markets index may continue to rise before hitting its peak.”
Morgan Stanley continues to rank India as its top choice among emerging markets and its second favorite in the Indo-Pacific region, just behind Japan.
In terms of stocks, the firm favors cyclicals over defensives and large-caps over small-caps. It remains overweight on sectors such as financials, technology, consumer discretionary, and industrials, while underweight on others.
($1 = 83.9690 Indian rupees)
